Current market conditions could cause more than half of US Tier 1 automotive suppliers to file for bankruptcy in 2009, creating 1 million additional job losses and creating an estimated $9 billion income tax revenue shortfall, according to a new study from global management consulting firm A.T. Kearney.
The dramatic drop-off in sales volumes that is impacting the OEMs is having a ripple effect on the health of their Tier 1 suppliers. In particular, suppliers with large capital investments stranded in dedicated, underutilized facilities are especially at risk.—A.T. Kearney Partner and North American Automotive Practice Leader Dan Cheng
A.T. Kearney conducted a survey of the top-tier automotive suppliers to North America to assess the impact of the economic downturn on their financial health. In addition, the firm created a number of scenario-based market projections to analyze the health of these suppliers over the 2009-2010 timeframe. Key findings from the survey include:
Volume Decline: A significant drop in auto sales has exposed under-utilized high capital intensive operations.
Commodity Prices: Raw material prices have increased 24% over the past year—a portion of which some suppliers have still been unable to totally pass onto their OEM customers.
Operational Issues: High fixed costs and excess capacity present a significant challenge in the face of falling demand that has impacted cash flow, bringing many suppliers to the brink of bankruptcy.
Tier 1 suppliers are in an especially difficult predicament. In addition to the difficulty of passing raw material costs on to OEM customers, their supply base (Tier 2 and 3 suppliers) is becoming increasingly fragile. A.T. Kearney’s survey findings indicate that Tier 1 suppliers anticipate that up to an additional 23% of their supply base will be in immediate financial distress within the next 12 months and present a significant challenge to their own operations.
The recent, extremely weak auto sales figures are the third blow to the industry this year, with consumer confidence driven to new lows from falling home prices, a declining stock market and an uncertain economic future. There is some panic in the industry, as car companies and their suppliers realize that sales demand volume is not bouncing back anytime soon.—A.T. Kearney Automotive Partner Doug Harvey
A.T. Kearney’s survey indicates that more than 29% of Tier 1 suppliers place restructuring as a top priority in 2009, while more than 20% will choose to focus first on operational improvements. Activities in the short term can include financial restructuring and improving cash positions via wage adjustments, inventory or asset liquidation.
A.T. Kearney’s Automotive Supply Base Financial Health Survey focuses on three topics to assess the threat of bankruptcy within the Tier 1 Supply Base. These topics include: Bankruptcy Impact of Tier 2 and 3 Suppliers, Supplier Base Performance measured in quality, pricing, communications, and Risk Mitigation Techniques employed including diversification, negotiations and restructuring. The respondent company profile included over seven industry segments within the Tier 1 supply base, with Chassis and Frames comprising the largest portion - 24% of respondents.